Distribution costs are increasing, as are the challenges of maintaining a robust supply chain – both labor and trucking capacity are tight, and customer demands for fast shipping at a low cost are increasing.
“The cost of the supply chin as a percentage of the total cost of the item has never been higher,” says Rick Holden, vice president of business development at Riverside Logistics Services in Henrico, Va. “Amazon has changed everything in our business, for better and worse.”
Holden is referencing what is known as the “Amazon Effect” – the push for a higher levels of service, faster deliveries (same-day or two-hour) and low-cost or free shipping. The joint pressures of increasing velocity while lowering cost have made it difficult for supply chains to operate profitably, particularly given the increasing cost of transportation and scarcity of qualified labor.
“Just figuring out how to address that from a technology, automation or network standpoint in a profitable way has been a challenge for a lot of our clients,” John Lowe, principal, supply chain and consulting services, at Tompkins International, based in Raleigh, N.C.
The labor shortage has also made it difficult for companies to expand or adjust their distribution center networks to desirable locations with existing infrastructure and access to major airports and freeways. “Everybody wants to be in those areas, and they are all competing for the same labor pool,” Lowe says. “The need for labor is a huge risk area for them for both peak and non-peak times.”
That means driving efficiency in distribution operations has become even more critical.
“Every penny spent in the supply chain on a part equals some landed cost on the item,” Holden says. “Companies are looking at that more holistically now. In the past they would drive down cost in one sector – maybe they would beat transportation down to the lowest cost – but they didn’t realize they were driving up the cost of warehouse space because they were trying to ship large orders.”
How can you increase that efficiency? Lowe and Holden provided a few tips:
Strategy Before Structure: Make sure you have a clear idea of what you want your distribution operations to look like, and what you are trying to accomplish before you start investing in new facilities or technology. “When we have initial conversations with clients, we ask them to think about who they want to be, where they want to be, and what is the competitive landscape and their value proposition,” Lowe says. “That becomes an input on the structure.”
Evaluate Supply Chain Plans Based on the Unit: If you don’t know what it costs to package and ship every item in your supply chain, you should. This has a direct impact on the “where” and “how” of your distribution network design. “Break it down to a movable unit,” Holden says. “How do you want to ship it – as an item, a box, or a pallet? What kind of volume are you selling?”
Look at weight and box dimensions. “You have to drive down and understand the cube you are going to store, how it will move, and what are the inventory turns,” Holden says. “Turns are key.”
Optimize Existing Processes: Before implementing any type of automation or new systems, make sure your existing distribution processes are running smoothly and efficiently. “That’s the old adage, if you automate a bad process, you just get a faster, bad process,” Lowe says. “There’s a lot of low hanging fruit in DCs, where you can take steps out using approaches like Lean or Value Stream and take waste out of the facility.”
Reduce Wasted Motion: Once those processes are streamlined, look at automating as much product movement as possible. Many DCs have implemented “goods-to-person” systems. With these systems, items are brought to a central pack area via robotic carriers, conveyors, or some combination of the two in order to eliminate wasted time spent walking back and forth to the shelves. That can save hours of walking per employee, per shift, and boost productivity without hiring additional staff.
Consider Re-Shoring or Near-Sourcing: Many companies moved to overseas manufacturing because labor and other costs were so low. With shipping costs rising, the economics have changed. “The cost to get things here can outweigh the value they are getting,” Holden says. “Lead time are also higher. If you are making something closer to market, you can actually be more effective and competitive, even though it may feel like it costs more – it really doesn’t.”
Leverage Stores as Fulfillment Centers: For companies with a retail presence, the idea of buying online and picking up at a store, or using the store as a source of inventory for transfers, has gained traction. “Everywhere a company has a product, whether that’s a DC or a store, those all become fulfillment nodes,” Lowe says. “Leveraging technology to figure out where the inventory is has to be a number one priority. What is the best method to fulfill that order based on service and location? The closer you get to the customer, using the store or a smaller footprint, rapid deployment DC for fast-moving SKUs can make sense economically.”
SKU Rationalization: The aftermarket struggles with a preponderance of SKUs, given the need to support so many aging vehicles. Look at the slow movers and see if there is a way to still serve customers without holding that inventory. “The opportunity cost of holding that SKU may not be as high as storing more faster moving, profitable items,” Lowe says. “The right solution might be to outsource that and have it drop shipped, or provide longer lead times for those older parts.”
Outsourcing: For manufacturers, it may pay to shift more of the logistics burden to a third-party provider, especially given the headaches involved in finding real estate, warehouse space, and available trucking capacity. “What do you want to invest your dollars in?” Holden says. “You can take more of your money and invest that in making your products better, and then hire a company that is good at logistics to get it delivered.”
